The status of the United Kingdom as a euro area “outsider” has come under renewed scrutiny since the outbreak of the European sovereign debt crisis in late 2009. A series of policy and institutional reforms have been adopted that reinforce integration among euro-area member states. Ongoing negotiations (as of April 2013) on the creation of a Single Supervisory Mechanism for euro-area banks and a “Banking Union” threaten to further entrench Britain's second-tier status. While London's position as the European Union's leading financial center appears secure for the time being, the reinforcement of euro-area economic governance creates a potential menace for the “City's” preeminence—with, for example, the official preference of the European Central Bank (ECB) and some governments that major euro clearing operations take place within the euro area. Ophelia Eglene's impressive study serves as a timely reassessment of the preferences of different British governments over the past two decades not to adopt the euro.
Eglene's is the most theoretically sophisticated study yet published on British policy on the Economic and Monetary Union (EMU). It also ranks among the stronger political science analyses of European Union member-state government preferences on the EMU. The argument, covering both the impact of economic interests on government preference on monetary integration and the impact of government policy interests in European Union policymaking more generally, suggests a superficial analysis, wedding two very different explanations of British policy. However, Eglene's study is far from this.
The bulk of the author's analysis involves an application of two of the leading political economy theories on government preferences on participation in exchange rate regimes to explain British policy on the EMU: Jeffry Frieden's (“Invested Interests: The Politics of National Economic Policies in a World of Global Finance,” International Organization 45 [Autumn 1991]: 425–51; “Real Sources of European Currency Policy: Sectoral Interests and European Monetary Integration,” International Organization 56 [Autumn 2002]: 831–860) and C. Randall Henning's (Currencies and Politics in the United States, Germany, and Japan, 1994). Both Frieden and Henning make specific claims as to government policy being directed by a configuration of economic interests, with distinct preferences on exchange rates and whether they are fixed or flexible.
Eglene tests specific hypotheses derived from these two theories. Frieden's well-known hypothesis is, simply put, that national policy on exchange-rate regimes reflects the balance of economic interests in favor of or against fixing the exchange rate. Exporters tend to like fixed exchange rates at a depreciated rate, while investors prefer fixing at an appreciated rate. Companies producing nontradable goods and services prefer flexibility and appreciation, while producers of import-competing products like flexibility and depreciation. An application of Henning's hypothesis provides additional added value. On the one hand, Henning's approach is even more parsimonious than Frieden's: Export-oriented industry has a “strong and unambiguous” preference for a fixed but depreciated currency, while international banking has ‘mild and ambiguous’ preference for flexibility and appreciation. On the other hand, Henning adds a helpful political economy underpinning to his approach: The relationship between banks and nonfinancial companies (NFC) shapes bank preferences. In countries where capital markets dominate the financial system, this bank–NFC relationship will be more distant and the preferences of banks more detached from those of NFCs. In credit-based financial systems where relationships are closer—with German relational banking as the clearest example—bank preferences are more likely to be shaped by those of NFCs.
The author's broader objective is not to side with one theory over another but to apply both, the better to tease out the interests involved and the impact on British government policy. Eglene finds for the applicability of Frieden's approach but against the further clarifications of his 2002 article and a differentiation between standardized and specialized goods exporters. Finding for Henning, Eglene shows that more distant bank-industry relations in the United Kingdom resulted in banks forming preferences that were distinct from those of industry—the pro-euro “Britain in Europe” campaign failed to recruit many members from the financial sector—and confirms his hypothesis about the intensity of preferences. Given the divisions in manufacturing and services, the soft financial-sector opposition to the EMU shifted government policy toward a preference against membership. The relative importance of the financial sector in the British economy increased the sector's relative influence over government policy. Most of these findings are not, in themselves, surprising and confirm what has been written elsewhere. The ability of the author to relate these findings to the theoretical literature nonetheless provides clear added value to our understanding of British government preferences on the single currency.
Eglene adds a further level of theoretical sophistication to her analysis: She convincingly shows how actors' stated preferences and firm lobbying of public authorities—and thus the underlying political economy of British policy on the EMU—shift over time. For example, she shows that the preferences of trade associations—concerned with their “public image”—differed at specific periods from the individual businesses that they were supposed to represent. The author also explains why business groups formed preferences relatively quickly, while finance was slower. On this temporal dimension, the bulk of the literature on exchange rate preferences is silent.
Eglene also enters into the details of the preference formation of the main economic interests, moving beyond any previous account. Notably, she shows how the financial sector was concerned not only with the impact of fixing exchange rates (and the inflation performance of the ECB) but also with technical issues concerning the operation of the EMU. Notably, membership would have imposed a higher minimum reserve requirement on UK-based financial institutions that would have been damaging to financial interests, which gained competitive advantage from lower requirements. The author thus shows how the City attracted business from the euro area by staying out of the EMU! But the City also wanted to ensure access to the euro area's wholesale payment system (TARGET) which explains initial caution as to remaining outside of the EMU. She also shows how different economic interests had varying influence over government policy, but not only because of their relative contribution to the economy. Internationally oriented exporters had influence because they could leave. Yet this was not enough to bring about a definitive shift in government policy on the single currency. Rather, Eglene shows that these industries forced governments to offer compensatory policies and maintain a certain ambiguity on eventual entry (“wait and see” for the Conservatives, and “prepare and decide” for Labour). Neither leading party has ever definitely opposed eventual membership—despite the appearance of greater hostility from the Conservative Party.
In making her argument, Eglene brings to bear an impressive range of quantitative and qualitative data. She covers most of the important secondary literature and puts interview material to good effect. Empirically, there is little in Banking on Sterling that has not been examined previously, although the author competently covers the most important dimensions of the subject, and she presents a few new golden nuggets of information—notably on financial sector preferences, as noted. The book serves as an excellent rejoinder to (constructivist) analyses of British nonmembership in the EMU that emphasize “Euro-skepticism” and “deeply rooted” opposition to further integration. Ultimately, though, this is a first-rate work of political science/political economy that should be of immense interest to scholars working on Britain and the EU, British economic policy, European economic integration, and, more broadly, economic (business) interests and public policy.
